Daily Topics

This is an open thread on topics from blog posts. The "Daily Chatter Box" is available for discussion on any subject or just to chat. This page is intended for discussion on commentary of posted articles. Just click Comments and discuss away.

3/17/2009

Ask the average person which is the correct answer to the following question: Which president gave the biggest tax cuts for the rich — Reagan or Bush?

I would bet the rent money that you would not get the correct response, which is: Presidents have no taxing authority. Article I, Section 8 of the U.S. Constitution says: "The Congress shall have power to lay and collect taxes, duties, imposts and excises."

I know that many politicians and news media people read my column. How do we characterize them if they continue to speak of presidents cutting or raising taxes?

Another tax question: If there's an imposition of a property tax on your land, who pays the tax? I guarantee you that land does not pay taxes; only people pay taxes. That means a tax on your land is a tax on you.

You say, "Williams, that's pretty elementary, isn't it?" But what do you say to a politician or news media people who propose increasing corporate taxes as means to get rich corporations to pay their rightful share of government?

They should be told that they speak nonsense because corporations, like land, do not pay taxes; only people pay taxes.

If a tax is levied on a corporation, and if it is to survive, it must raise the price of its product, or lower dividends or lay off workers. In each case, it is people, not some legal fiction called a corporation, who bear the burden of any tax levied on the corporation.

An important subject area in economics called tax incidence says that the entity upon whom a tax is levied does not necessarily bear the burden of the tax. Some of the tax burden can be shifted to another party. That's precisely what corporations do and as such they are merely government tax collectors.

Here's another tax question: Which worker receives the higher pay: a worker on a road construction project moving dirt with a shovel or a worker moving dirt with a giant earthmover?

If you said the guy on the earthmover, go to the head of the class. But why? It's not because he's unionized or that employers just love earthmover operators. It's because having more capital (tools) makes him more productive and therefore he earns higher wages.

It's not rocket science to conclude that whatever lowers the cost of capital formation enables workers to have more capital to work with and enjoy higher wages. Policies that raise the cost of capital formation such as capital gains taxes, low depreciation allowances and high corporate income taxes, and thereby reduce capital formation, serve not the interests of workers, investors nor consumers.

Taxes also reduce transactions. I need my computer repaired. You and I agree that the job is worth $200. Suppose there's the imposition of a 30% income tax on you. That means you would net only $140 and might refuse the job.

You might suggest that if I were willing to pay you $285, you would do the job because at that price your after-tax earnings will be $200 — what doing the job is worth to you.

There's a problem. The repair job was worth $200 to me, not $285. So it's my turn to say the heck with it. Or would we — and society — be better off if you and I agreed to the repair job but did not tell anybody? I'd say yes, but we'd be criminals.

You might wonder how congressmen can get away with taxes and other measures that reduce our prosperity potential. Part of the answer is the anti-business climate promoted in academia and the news media. The more important reason is that prosperity foregone is invisible.

In other words, we can never tell how much richer we would have been without today's level of congressional interference in our lives and therefore don't fight it as much as we should.

The darkest times in human history have all begun when someone decided "not to let a serious crisis go to waste". In fact, it is in times of economic crisis that folks are most susceptible to the ideas of tyrants. We look for an answer, any port in a storm that will shield us from the unknown. And in our desire to be safe, we open ourselves up to things that we would never have dreamed of allowing in normal times.

Consider, my friends that Germany in the 1930's was suffering from massive unemployment and high inflation, mostly due to the effects of the Great Depression. Hitler appointed Hjalmar Schacht as Minister of Economics to combat this and bring Germany into fresh prosperity. Schacht leaned on Keynesian Economics to this end, specifically in the areas of large public works programs supported by deficit spending. For those that don't know, deficit spending is when the Government purposefully spends more money than they receive through tax revenues. The theory is that by spending into deficit, the government creates jobs which increases consumer spending. This in turn, creates more business by supplying for the new spending being done.

The natural reaction that rational people have to deficit spending is to talk about the "burden of the national debt". The idea of course is that if we create debt now, future generations will have to pay that debt off and we therefore are saddling them with a burden that is unfair. Interestingly, this reaction has been in place since the 1930's when Keynes first introduced his theory. Now, is it any wonder that the current administration has been untouched by the Right's cries regarding the burden of the national debt? To them it is the expected and naïve cry of the bourgeoisie used to scare the ignorant proletariat.. To the Keynesians, the debt-income ratio would disappear over time anyway, provided the economy grew fast enough.

Forgive my descent into macroeconomic theory, friends, I do have a point here. However, I want you folks to understand what is happening all around you right as we speak. Obama's administration has embraced Keynesian economic theory. That is the reason for the massive spending bill, the Omnibus bill and the bailouts. They believe that by combating the current recession with massive governmental public works and deficit spending, they can end the economic crisis. Hjalmar Schacht and Adolf Hitler believed the exact same thing and Schacht applied the theory to Germany's Depression economy. After jolting the economy with massive deficit spending, the next step was to implement the Reinhardt Program, combining tax reductions with public investment in roads, railways and waterways. Now while it cannot be argued that both practices worked in getting Germany well on the road to recovery, it also is evident that it was the death of the free market in Germany and the perfect springboard for Hitler's rise to dictatorship.

In the Germany of the 1930's, the economic troubles served as a serious crisis in which the National Socialist Party could push through major reforms. When your job, your home, your livelihood seems to be in peril, people look for a voice, any voice, that seems to have the answer for their day-to-day problems. The more charismatic that leader is, the quicker his ascent to power during a crisis. Not only that, the more charismatic the leader is, the further people will allow themselves to be led down a path that they would normally rebel against.

Hence, the Keynesian theories that Hitler introduced to a desperate population not only served to jolt Germany's economy into recovery, it also served to make the Germans dependent on the government for their welfare and by extension then, on Hitler himself. He became their savior when in fact, he was their greatest doom.

There is no better time to introduce seismic shifts in a nation's identity than during an economic crisis, if you are the right kind of despot. In the years before the French Revolution, Necker borrowed and Calonne spent to combat the crisis caused by France's financing of the American Revolution. This led to a deepening of the crisis and eventual overthrow of the government. In 1917 in Tsarist Russia, the Bolsheviks used the economic crisis to overthrow the government and Lenin rose to power amidst the flames. Over and over throughout history we see the same pattern playing itself out; in the midst of crisis, the crazies take over the nuthouse.

We stand on a treacherous precipice here in America today. Had you been able to ask a German prior to Hitler's rise to power if Germany was capable of the Final Solution, do you think that they would have laughed you to scorn? Do we see that it was not a monstrous sub-class of people who carried out the orders of the Reich but rather normal people who were living their normal lives and were carried away into madness in degrees by a man who understood that times of crisis were perfect opportunities for major reform? The story of the Russian Revolution carries with it the exact same lessons that we fail to see. It was economic crisis that lent itself to the ascent of the Communist party and to the deaths of multiplied millions of Russians at the hands of that regime.

When good people relinquish the power of the free market, the power that rests in the hands of the individual, and look to a charismatic figure for help, disaster is right around the corner. It is nothing new that is happening in the world today, my friends. It is the same thing that has been happening since the dawn of time; it takes a crisis to enthrone a monster and I fear that something wicked this way comes.

3/08/2009

3/04/2009

With some help from the Student Entrepreneur Society at the University of Michigan-Flint (especially Jennifer Moore), and an old 1950 Sears catalog purchased from Ebay, we were able to compare the costs of 16 typical household items in 1950 to the costs of those same items today, measured in the cost of our time to purchase those household items. Using the average hourly manufacturing wage of $1.30 in 1950 and $18.01 today, the hours of work to purchase those 16 household items in both 1950 and 2009 are displayed above (click to enlarge). In all cases, we tried to match the size and quality of the items as closely as possible in both years.

Bottom Line: In 1950, it would have taken almost 8 months of full-time work at the average manufacturing wage to earn the $1,650 needed to purchase the 16 items above at the retail prices in 1950 (or 31.7 weeks, 158.4 days, or 1,267 hours). Today, it would take only 1.6 months of work at the current average hourly wage of $18.01 to earn the $4,580 necessary to purchase those same items at today's retail prices (or 6.4 weeks, 31.8 days or 254.5 hours).

To what do we owe this significant 80% reduction in the time cost of household goods over time? It's all part of the miracle of the market economy.

Congress may not be overflowing with constitutional scholars these days - but you'd think at least some of its members could read.

The Senate this week voted to grant the District of Columbia full voting membership in the House of Representatives - a measure expected to win quick approval both from the House and President Obama.

It was probably to be expected, of course, that the Democrats would try to grow their margin in Congress as much as possible: DC is heavily Democratic - and the extra seat given to Republican Utah in the same bill would potentially be reapportioned after the 2010 Census.

Their only problem is the plain language of the US Constitution:

"The House of Representatives shall be composed of members chosen every second year by the people of the several states," reads Article I, Section 2.

And Article 1, Section 8, clearly defines DC as "the seat of the government of the United States" - that is, not a state. Plus, the 23rd Amendment grants DC the presidential electors "to which the District would be entitled if it were a state."

Case closed.

Whether DC should have representation, of course, is another matter; that's why the Constitution also contains an amendment process.

What it certainly doesn't allow is the gutting of its clear meaning whenever transient majorities in Congress think it's time for a change.

Adding to the outrage, experts are uncertain whether anyone has standing to sue to overturn this abomination.

Let's just hope this isn't how Obama and his allies plan on treating the rest of the document.

2/25/2009

2/22/2009

The world always has faced problems, some seemingly beyond the human capacity to solve, yet we always eventually do and eventually we move forward. Over the long haul mankind advances but not without periods of serious retraction.

The Dark Ages were called dark for a reason, mankind regressed into a funk that lasted not just decades but centuries. Sure there were advances but all in all that period can not be considered a great step forward for the human species here on the blue planet. There have been others too, the history of the advancement of mankind is more an object lesson in fits and starts than some rolling tide of progress.

The main reason for this is that mankind is comprised of well ...humans and humans have not changed all that much really. Oh we have evolved through technology and advancement in education, but some of our basic characteristics remain pretty much as they were in the beginning, wherever you choose to start that beginning from.

Just a couple of quick examples here to make the point. Are humans less likely to be susceptible to greed today than they were in lets say Caesar's time? I doubt it but even if we are, greed is still very much with us. The same can be said for evil, Hitler and Stalin were by no means the last in the long line of evil characters that have populated the human experience since that unknown beginning of the human race. How about the not quite evil propensity of the power hungry personality? You might even know a few of those characters in your own life.

Whoever wishes to foresee the future must consult the past; for humanevents ever resemble those of preceding times. This arises from the fact thatthey are produced by men who ever have been, and ever shall be, animated by thesame passions, and thus they necessarily have the same results.Machiavelli

The wonderful aspect of looking at the human experience over the historical scale rather than through just the lifetime experience, you are able to see the good and inspiring alongside the evil and destructive without emotional attachment to the here and now. But the most important aspect of the historical context, is we are allowed to see what works and what does not.

Although in the long run I believe that all things ultimately work for the good, after all the Dark Ages beget the Renaissance. The more we look to the past the less likely we are to make the mistakes of the past if we are willing to learn from it. The problem of course is that too few learn and others think that this time it will be different.

Those who cannot remember the past are condemned to repeat it.

George Santayana

The other night I was watching television and suddenly I was awe struck by the commercials. There was nothing unusual, the typical luxury car, cell phone, delivery service, fast food fare one typically experiences on an evening television viewing. What struck me was how amazing it was that all this stuff was part of the human experience today.

Just for a second put yourself at the turn of the twentieth century and what your life would consist of compared to today. The advancement of human achievement boggles the mind in a mere century of time. In two generations, actually less we went from the horse and buggy to the moon and from the telegraph to the world wide web.

We can argue the good and the bad of any or all of these advancements on the human experience but one thing we can not argue is the tremendous accomplishments of it all. I tend to believe that technological advancements ultimately work to the good of mankind. But here is the point, at least one of them.

What was responsible for this tremendous advancement? Was it socialism? Next time you pick up your cell phone to make a call, ask yourself, did socialism create this? Of course it didn't, nor the automobile you drive, the computer you read this on , the countless necessities and luxuries we enjoy and use on a daily basis are not the product of socialism or communism, they are undeniably the product of capitalism, pure and simple.

Ask yourself, what great technological, engineering, medical or any other significant accomplishment can be directly attributed to a socialist system of government? It is true that when a socialist form of government reaches the stage of totalitarian as they must ultimately do to continue, brute force can mandate certain accomplishments. After all Hitler gave us the foundation for the space program and his was a quasi-socialist society.

Yet here we are in America of all place flirting with socialism, heck we are beyond the flirtation stage, we are into serious foreplay. We have watched over the decades as socialism in almost every form has shown itself to be totally inadequate to meet the needs of a society.

Everyone knows why this is, socialism does not account for one of man's most basic instincts, the need to achieve. It actually deprives men of that basic desire and stifles it. If a person is not responsible for his or her success or failure, if this is a product of the collective whole, then to be blunt why bother?

Why bother with the extra hours, the extra effort, when all your work is to be divided equally among your so called peers by authorities who determine what is best for society, as if they were some how divinely inspired to make such judgements.

“You Americans are so gullible. No, you won’t accept Communism outright; but we’ll keep feeding you small doses of Socialism until you will finally wake up and find that you already have Communism. We won’t have to fight you; we’ll so weaken your economy, until you fall like overripe fruit into our hands.”

Nikita Sergeyevich Khrushchev

The Soviet system collapsed because in the end any system based upon socialism can not sustain itself. However the lure of socialism and those who naively believe that you can eat its forbidden fruit without being poisoned by it persist. The poison of Socialism is simply this, "I am not responsible for myself." It is the path of the lazy.

Much was made of George Bush and his infringement on civil liberties with the Patriot Act which by the way passed the congress with overwhelming bi-partisan support. Often quoted by leftist know it all were the words of Benjamin Franklin.

Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety

In truth, the path that we are being led down is far more in keeping with those words than any threat we face from previous external or internal forces. Lincoln suspended Habeas Corpus to save the Union, Woodrow Wilson jailed literally thousands of persons who opposed the "Great War" and of course Franklin Roosevelt interned an entire population of Japanese Americans in the name of National Security all without Congressional approval, yet we learned and vowed to watch for such abuses in the future.

Yet here we are willingly giving over our most precious gift as Americans, our liberty, piece by ever larger piece for the promise of safety, economic safety. When a person an institution or a business is not held accountable for its failure, but is rather absorbed or rescued by the collective whole as is the process which we are increasingly engaged in, we will neither end up with safety or liberty.

Our founding fathers went to great pains to insure that this would not happen. The very essence of our Constitution is to protect the individual from the encroachment of a monolithic government. They warned over and over again in their writings that the power of government was not a good thing but as Thomas Paine cautioned:

Government, even in its best state, is but a necessary evil; in its worst state, an intolerable one.”

The path that we are following is leading from the necessary evil to the intolerable for any person who considers liberty to be the divine right of man, which is not a religious proposition but a historic and political reality.Recently I was accused of not keeping up with the times, that somehow my views were outdated. As is the case with much of the liberal nonsense espoused as being enlightened, it is the opposite. I do not wish to hold onto the past out of some traditional reverence, I want to protect the future for further generations. The idea that giving up a bit of personal freedom for a larger good is not enlightened, it is oppressive and ultimately destructive.

We will overcome these times, human history is one of advancement, the only question is will we take a step back into the dark in order to more clearly see the light.

2/21/2009

The idea that even the brightest person or group of bright people, much less the U.S. Congress, can wisely manage an economy has to be the height of arrogance and conceit. Why? It is impossible for anyone to possess the knowledge that would be necessary for such an undertaking. At the risk of boring you, let's go through a small example that proves such knowledge is impossible.

Imagine you are trying to understand a system consisting of six elements. That means there would be 30, or n(n-1), possible relationships between these elements. Now suppose each element can be characterized by being either on or off. That means the number of possible relationships among those elements grows to the number 2 raised to the 30th power; that's well over a billion possible relationships among those six elements.

Our economic system consists of billions of different elements that include members of our population, businesses, schools, parcels of land and homes. A list of possible relationships defies imagination and even more so if we include international relationships. Miraculously, there is a tendency for all of these relationships to operate smoothly without congressional meddling. Let's think about it.

The average well-stocked supermarket carries over 60,000 different items. Because those items are so routinely available to us, the fact that it is a near miracle goes unnoticed and unappreciated. Take just one of those items -- canned tuna. Pretend that Congress appoints you tuna czar; that's not totally out of the picture in light of the fact that Congress has recently proposed a car czar for our auto industry. My question to you as tuna czar is: Can you identify and tell us how to organize all of the inputs necessary to get tuna out of the sea and into a supermarket? The most obvious inputs are fishermen, ships, nets, canning factories and trucks. But how do you organize the inputs necessary to build a ship, to provide the fuel, and what about the compass? The trucks need tires, seats and windshields. It is not a stretch of the imagination to suggest that millions of inputs and people cooperate with one another to get canned tuna to your supermarket.

But what is the driving force that explains how millions of people manage to cooperate to get 60,000 different items to your supermarket? Most of them don't give a hoot about you and me, some of them might hate Americans, but they serve us well and they do so voluntarily. The bottom line motivation for the cooperation is people are in it for themselves; they want more profits, wages, interest and rent, or to use today's silly talk -- people are greedy.

Adam Smith, the father of economics, captured the essence of this wonderful human cooperation when he said, "He (the businessman) generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. ... He intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain." Adam Smith continues, "He is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. ... By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it." And later he adds, "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."

If you have doubts about Adam Smith's prediction, ask yourself which areas of our lives are we the most satisfied and those with most complaints. Would they be profit motivated arenas such supermarkets, video or clothing stores, or be nonprofit motivated government-operated arenas such as public schools, postal delivery or motor vehicle registration? By the way, how many of you would be in favor of Congress running our supermarkets?

All of America was watching Barack Obama on Jan. 20 as he promised to "preserve, protect and defend the Constitution of the United States." But few thought that, within a month, controversy would arise over the Constitution's census clause.

"Representatives and direct taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers," reads Article I, Section 2 of the Constitution. "The actual Enumeration shall be made within three Years after the first Meeting of the Congress of the United States, and within every subsequent Term of ten years, in such Manner as they shall by Law direct."

This was a revolutionary step. Censuses had been conducted since ancient times, as readers of the Gospels know. But the United States was the first nation to conduct a census at regular intervals. And it was the first nation to base legislative representation on population. Not many federal agencies perform functions specifically set out in the Constitution. The Bureau of the Census does.

Today, the census determines more than representation. It also determines the amount of federal funding for a vast array of programs. As a result, politicians have an incentive to try to maximize the numbers of their constituencies. On occasion, they have rejected results they have found distasteful. After the 1920 census showed an increasing proportion of urban dwellers, Congress refused to reapportion seats in the House of Representatives among the states.

But under prodding from President Herbert Hoover, a law was passed setting a formula for automatic reapportionment based on the census numbers starting in 1930 and continuing to this day.

You didn't hear much about the census on the campaign trail. But controversy flared when Obama nominated Republican Sen. Judd Gregg to head the Department of Commerce, which has housed the Census Bureau since 1903. Almost immediately, there were protests from Congressional Black Caucus Chairwoman Barbara Lee (who cast the lone vote against military action in Afghanistan in 2001) and Hispanic groups. White House Press Secretary Robert Gibbs declared that the Census Bureau would report directly to the West Wing of the White House.

Gregg, perhaps miffed that a major function of the office for which he had been nominated would be taken over by Chief of Staff Rahm Emanuel, withdrew his name from consideration to be secretary. No new nominee has been named, but the issue remains: Will the politicians cook the numbers?

The black and Hispanic groups are concerned that blacks and Hispanics will not be fully counted. This is not a new issue. Census statisticians have known since the 1970s that there have been undercounts of people in neighborhoods with high crime rates or large numbers of illegal immigrants. Census Bureau professionals have worked to measure these undercounts and to minimize them by using official records and enlisting local volunteers to locate residents. Their efforts have had some success, as the undercount was lower in 2000 than in 1990.

Nonetheless, there have been demands that the Census numbers be adjusted by statistical sampling. The Supreme Court ruled in 1999 that sampling could not be used to apportion House districts among the states, but left open whether it could be used for other purposes. But after an intensive three-year study, Census professionals in 2003 said they could not guarantee that sampling would produce a more accurate count than the enumeration decreed by the Constitution.

As then-Census Director Louis Kincannon said, "Adjustment based on sampling didn't produce improved figures." Sampling might produce a more accurate number for large units but not for smaller units -- just as the sampling error in public opinion polls is small for the total population but much larger for small subgroups. At the block level, sampling would result in imputing people who aren't actually there.

The potential for political mischief, political overrepresentation and greater federal funding for favored groups is obvious, just as Congress' refusal to reapportion after the 1920 Census resulted in political overrepresentation of low-growth rural areas and under-representation of then-booming big cities.

The better procedure is to trust the professionals at the Census Bureau. "I found the Census personnel to be among the most conscientious of any group I'd encountered in government service," Bruce Chapman, census director in the Reagan administration, recently wrote.

"Whatever their personal political views (I suspect that most voted for Obama), their allegiance is to the integrity of the positions of public trust they hold." This comports with my own observations of Census personnel over the years. Like other federal statistical agencies, the Census Bureau has a proud culture, developed and nurtured over many years and in many administrations, of independence from political manipulation and dedication to statistical rigor.

So it's dismaying that the Obama White House, in response to political pressure, would consider overseeing the 2010 census. A better approach, endorsed by seven former Census directors and embodied in a bill sponsored by Rep. Carolyn Maloney, a New York Democrat, would be to set the Census Bureau apart as an independent agency. That would preserve, protect and defend the census that the framers of the Constitution took pains to establish.

2/20/2009

The sacred rights of mankind are not to be rummaged for among old parchments or musty records. They are written, as with a sunbeam, in the whole volume of human nature, by the hand of the divinity itself; and can never be erased.

2/17/2009

When communism ended (and I deliberately like to say that it was a collapse, not a defeat), it seemed that the ideas and institutions of that system were so thoroughly discredited that they couldn't return in any foreseeable future. And it seemed that no person could possibly - without blushing - dare to publicly defend them.

It seemed unreasonable to expect that people would prefer to trust the state instead of the markets once again; that they would believe that one can distribute more wealth than what is being produced; that people have a right for high living standards rather than that they must deserve them; that an arbitrarily lustrous doctrine is more important than the human freedom; that the wisdom of the anointed is more than the knowledge of the "ordinary" people.

Who was naive

However, we were not quite naive. During the last two decades, many of us were warning that those attitudes were only partially abandoned in the post-communist part of the world (and some third-world countries), that even those countries were quickly depleting the initial momentum, and that the "first" world was seeing no development of this kind at all.

But this opinion of ours was considered - politically correctly - to be just a part of our excessive sensitivity, a misunderstanding, and especially a proof that we were underestimating the "amazing" progress in America and Western Europe and that we were perhaps even jealous. Some extraordinarily blinded people considered our opinion to be a shadow of some obsolete attitudes - such as nationalism, pan-Slavism, and the belief in "extreme" doctrines (e.g. classical liberalism).

At any rate, our opinions were considered to be a product of our half-a-century-long leave of absence from the good company of the civilized and democratic countries and the Western pundits were hoping that we would learn our lesson soon.

Paris didn't understand

We have seen many problematic returns to the past in the European Union, both at the political and the economic level. Whenever some of us said so loudly, we were not only considered to be people of a different opinion, but even foolish, somewhat dumb, and naive people.

In this sense, my recent visit to Paris was insightful. No one disagreed with my opinions. Instead, these opinions were so distant from the French that they didn't understand them. It didn't help that I was only saying things that were completely obvious.

A power cartel

Attentive observers throughout the world are able to see these things. For example, Prof Wolfgang Kasper of Australia is writing about democracy, subsidiarity, and centralization and the European Union is his exemplary case of "de-democratization of the governance". He considers the union to be a "defensive cartel of power that is dragging the society to the bottom of the sea".

In the same group of his examples, we find the "final phase of the Roman Empire controlled from its center, closed China that was controlled by the Ming dynasty 400-500 years ago, centralized Ottoman empire 100-200 years ago, and the European Union that has been increasingly concentrated in Brussels since the 1970s". The increased regulation of the European economy is visible and enormous.

A new element in this ideological chaos is the recent economic downturn that is being attributed to the markets even though it should be obvious that it is a result of serious mistakes in the U.S. economic policymaking and similar mistakes in other advanced countries. And a manifestation of the cyclic character of the economic development.

The towering specter of Marx

However, my motivation to write this article was something else. Time magazine in the U.S. has dedicated one issue to President Obama's inauguration and it discussed the policies of the new administration. And it just happened - probably not by chance - that the editors have reserved six pages to an article called "Rethinking Marx" whose basic thesis was that "[a]s we work out how to save capitalism, it's worth studying the system's greatest critic".

On one hand, Peter Gumbel, the author, says that "we should dismiss his visionary plans for the future". On the other hand, it is argued that we should study his "trenchant diagnosis of the underlying problems of a market economy". It's worth mentioning that the author also considers The Communist Manifesto to be "almost uncannily prescient about globalization's costs and benefits". The author is logically led to the question whether we didn't make a mistake at the end of the 20th century when we prematurely rejected Marx's economic theories.

The reason why I am describing this article so extensively is that neither the author, nor the magazine, nor the timing are marginal. Time magazine has been among the very best titles in the U.S. printed media for many decades. We simply cannot ignore such things.

Václav Klaus, Hospodářské noviny (The Economic Times), February 17th, 2009: the author is the president of the Czech Republic. Translation: L.M.More...

2/16/2009

The free market is dead. It was killed by the Bolshevik Revolution, fascist dirigisme, Keynesianism, the Great Depression, the second world war economic controls, the Labour party victory of 1945, Keynesianism again, the Arab oil embargo, Anthony Giddens’s “third way” and the current financial crisis. The free market has died at least 10 times in the past century. And whenever the market expires people want to know what Adam Smith would say. It is a moment of, “Hello, God, how’s my atheism going?”

Adam Smith would be laughing too hard to say anything. Smith spotted the precise cause of our economic calamity not just before it happened but 232 years before – probably a record for going short.

“A dwelling-house, as such, contributes nothing to the revenue of its inhabitant,” Smith said in The Wealth of Nations. “If it is lett [sic] to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue.” Therefore Smith concluded that, although a house can make money for its owner if it is rented, “the revenue of the whole body of the people can never be in the smallest degree increased by it”. [281]*

Smith was familiar with rampant speculation, or “overtrading” as he politely called it.

The Mississippi Scheme and the South Sea Bubble had both collapsed in 1720, three years before his birth. In 1772, while Smith was writing The Wealth of Nations, a bank run occurred in Scotland. Only three of Edinburgh’s 30 private banks survived. The reaction to the ensuing credit freeze from the Scottish overtraders sounds familiar, “The banks, they seem to have thought,” Smith said, “were in honour bound to supply the deficiency, and to provide them with all the capital which they wanted to trade with.” [308]

The phenomenon of speculative excess has less to do with free markets than with high profits. “When the profits of trade happen to be greater than ordinary,” Smith said, “overtrading becomes a general error.” [438] And rate of profit, Smith claimed, “is always highest in the countries that are going fastest to ruin”. [266]

The South Sea Bubble was the result of ruinous machinations by Britain’s lord treasurer, Robert Harley, Earl of Oxford, who was looking to fund the national debt. The Mississippi Scheme was started by the French regent Philippe duc d’Orléans when he gave control of the royal bank to the Scottish financier John Law, the Bernard Madoff of his day.

Law’s fellow Scots – who were more inclined to market freedoms than the English, let alone the French – had already heard Law’s plan for “establishing a bank ... which he seems to have imagined might issue paper to the amount of the whole value of all the lands in the country”. The parliament of Scotland, Smith noted, “did not think proper to adopt it”. [317]

One simple idea allows an over-trading folly to turn into a speculative disaster – whether it involves ocean commerce, land in Louisiana, stocks, bonds, tulip bulbs or home mortgages. The idea is that unlimited prosperity can be created by the unlimited expansion of credit.

Such wild flights of borrowing can be effected only with what Smith called “the Daedalian wings of paper money”. [321] To produce enough of this paper requires either a government or something the size of a government, which modern merchant banks have become. As Smith pointed out: “The government of an exclusive company of merchants, is, perhaps, the worst of all governments.” [570]

The idea that The Wealth of Nations puts forth for creating prosperity is more complex. It involves all the baffling intricacies of human liberty. Smith proposed that everyone be free – free of bondage and of political, economic and regulatory oppression (Smith’s principle of “self-interest”), free in choice of employment (Smith’s principle of “division of labour”), and free to own and exchange the products of that labour (Smith’s principle of “free trade”). “Little else is requisite to carry a state to the highest degree of opulence,” Smith told a learned society in Edinburgh (with what degree of sarcasm we can imagine), “but peace, easy taxes and a tolerable administration of justice.”

How then would Adam Smith fix the present mess? Sorry, but it is fixed already. The answer to a decline in the value of speculative assets is to pay less for them. Job done.

We could pump the banks full of our national treasure. But Smith said: “To attempt to increase the wealth of any country, either by introducing or by detaining in it an unnecessary quantity of gold and silver, is as absurd as it would be to attempt to increase the good cheer of private families, by obliging them to keep an unnecessary number of kitchen utensils.” [440]

We could send in the experts to manage our bail-out. But Smith said: “I have never known much good done by those who affect to trade for the public good.” [456]

And we could nationalise our economies. But Smith said: “The state cannot be very great of which the sovereign has leisure to carry on the trade of a wine merchant or apothecary”. [818] Or chairman of General Motors.

* Bracketed numbers in the text refer to pages in ‘The Wealth of Nations’, Glasgow Edition of the Works of Adam Smith, Oxford University Press, 1976

The writer is a contributing editor at The Weekly Standard and is the author, most recently, of On The Wealth of Nations, Books That Changed the World, published by Atlantic Books, 2007

2/11/2009

Dr. Robert Higgs, senior fellow at the Oakland-based Independent Institute, penned an article in The Christian Science Monitor (2/9/2009) that suggests the most intelligent recommendation that I've read to fix our current economic mess. The title of his article gives his recommendation away: "Instead of stimulus, do nothing — seriously."

Stimulus package debate is over how much money should be spent, whether some should given to the National Endowment for the Arts, research sexually transmitted diseases or bail out Amtrak, our failing railroad system. Dr. Higgs says, "Hardly anyone, however, is asking the most important question: Should the federal government be doing any of this?" He adds, "Until the 1930s, the Constitution served as a major constraint on federal economic interventionism. The government's powers were understood to be just as the framers intended: few and explicitly enumerated in our founding document and its amendments. Search the Constitution as long as you like, and you will find no specific authority conveyed for the government to spend money on global-warming research, urban mass transit, food stamps, unemployment insurance, Medicaid, or countless other items in the stimulus package and, even without it, in the regular federal budget."

By bringing up the idea of constitutional restraints on Washington, I'd say Dr. Higgs is whistling Dixie. Americans have long ago abandoned respect for the constitutional limitations placed on the federal government. Our elected representatives represent that disrespect. After all I'd ask Higgs: Isn't it unreasonable to expect a politician to do what he considers to be political suicide, namely conduct himself according to the letter and spirit of the Constitution?

While Americans, through ignorance or purpose, show contempt for our Constitution, I doubt whether they are indifferent between a growing or stagnating economy. Dr. Higgs tells us some of the economic history of the U.S. In 1893, there was a depression; we got out of it without a stimulus package. There was a major recession of 1920-21; though sharp, it quickly reversed itself into what has been call the "Roaring Twenties." In 1929, there was an economic downturn, most notably featured by the stock market collapse, after which came massive government intervention — you might call it the nation's first stimulus package President Hoover and Congress responded to what might have been a two- or three-year sharp downturn with many of the policies President Obama and Congress are urging today. They raised tariffs, propped up wage rates, bailed out farmers, banks and other businesses, and financed state relief efforts. When Roosevelt came to office, he became even more interventionist than Hoover and presided over protracted depression where the economy didn't fully recover until 1946.

Roosevelt didn't have an easy time with his agenda; he had to first emasculate the U.S. Supreme Court. Higgs points out that federal courts had respect for the Constitution as late as the 1930s. They issued some 1,600 injunctions to restrain officials from carrying out acts of Congress. The U.S. Supreme Court overturned as unconstitutional the New Deal's centerpieces such as the National Industrial Recovery Act and the Agricultural Adjustment Act and other parts of Roosevelt's "stimulus package." An outraged Roosevelt threatened to pack the Court, and the Court capitulated to where it is today giving Congress virtually unlimited powers to tax, spend and regulate. My question to my fellow Americans is: Do we want a repeat of measures that failed dismally during the 1930s?

A more fundamental question is: Should Washington be guided by the Constitution? In explaining the Constitution, James Madison, the acknowledged father of the Constitution, wrote in Federalist Paper 45: "The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite. The former will be exercised principally on external objects, as war, peace, negotiation, and foreign commerce." Has the Constitution been amended to permit Congress to tax, spend and regulate as it pleases or have Americans said, "To hell with the Constitution"?

Walter E. Williams is a professor of economics at George Mason University.

2/07/2009

Governments cling to the delusion that a crisis of excess debt can be solved by creating more debt.

It began as a subprime surprise, became a credit crunch and then a global financial crisis. At last week's World Economic Forum in Davos, Switzerland, Russia and China blamed America, everyone blamed the bankers, and the bankers blamed you and me. From where I sat, the majority of the attendees were stuck in the Great Repression: deeply anxious but fundamentally in denial about the nature and magnitude of the problem.

Some foretold the bottom of the recession by the middle of this year. Others claimed that India and China would be the engines of recovery. But mostly the wise and powerful had decided to trust that John Maynard Keynes would save us all.

I heard almost no criticism of the $819-billion stimulus package making its way through Congress. The general assumption seemed to be that practically any kind of government expenditure would be beneficial -- and the bigger the resulting deficit the better.

There is something desperate about the way economists are clinging to their dogeared copies of Keynes' "General Theory." Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, they seem to be regressing to macroeconomic childhood, clutching the Keynesian "multiplier effect" -- which holds that a dollar spent by the government begets more than a dollar's worth of additional economic output -- like an old teddy bear.

They need to grow up and face the harsh reality: The Western world is suffering a crisis of excessive indebtedness. Governments, corporations and households are groaning under unprecedented debt burdens. Average household debt has reached 141% of disposable income in the United States and 177% in Britain. Worst of all are the banks. Some of the best-known names in American and European finance have liabilities 40, 60 or even 100 times the amount of their capital.

The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments propose to do.

The United States could end up running a deficit of more than 10% of GDP this year (adding the cost of the stimulus package to the Congressional Budget Office's optimistic 8.3% forecast). Nor is that all. Last year, the Bush administration committed $7.8 trillion to bailout schemes, in the form of loans, investments and guarantees.

Now the talk is of a new "bad bank" to buy the toxic assets that the Troubled Asset Relief Program couldn't cure. No one seems to have noticed that there already is a "bad bank." It is called the Federal Reserve System, and its balance sheet has grown from just over $900 billion to more than $2 trillion since this crisis began, partly as a result of purchases of undisclosed assets from banks.

Just how much more toxic waste is out there? New York University economistNouriel Roubini puts U.S. banks' projected losses from bad loans and securities at $1.8 trillion. Even if that estimate is 40% too high, the banks' capital will still be wiped out. And all this is before any account is taken of the unfunded liabilities of the Medicare and Social Security systems. With the economy contracting at a fast clip, we are on the eve of a public-debt explosion. And similar measures are being taken around the world.

The born-again Keynesians seem to have forgotten that their prescription stood the best chance of working in a more or less closed economy. But this is a globalized world, where uncoordinated profligacy by national governments is more likely to generate bond-market and currency-market volatility than a return to growth.

There is a better way to go: in the opposite direction. The aim must be not to increase debt but to reduce it.

This used to happen in one of two ways. If, say, Argentina had an excessively large domestic debt, denominated in Argentine currency, it could be inflated away -- Argentina just printed more money. If it were an external debt, the government defaulted and forced the creditors to accept less.

Today, America is Argentina. Europe is Argentina. Former investment banks and ordinary households are Argentina. But it will not be so easy for us to inflate away our debts. The deflationary pressures unleashed by the financial crisis are too strong -- consumer prices in the U.S. have been falling for three consecutive months. Nor is default quite the same for banks and households as it is for governments. Understandably, monetary authorities are anxious to avoid mass bankruptcies of banks and households, not least because of the downward spiral caused by distress sales.

So what can we do? First, banks that are de facto insolvent need to be restructured, not nationalized.(The last thing the U.S. needs is to have all of its banks run like Amtrak or, worse, the IRS.) Bank shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalization, but only after losses have been meaningfully written down. Those who hold the banks' debt, the bondholders, may have to accept a debt-for-equity swap or a 20% "haircut" -- a disappointment, but nothing compared with the losses suffered when Lehman Bros. went under.

State life-support for dinosaur banks should not and must not impede the formation of new banks by the private sector. It is vital that state control does not give the old, moribund banks an unfair advantage. So recapitalization must be a once-only event, with no enduring government guarantees or subsidies. And there should be a clear timetable for "re-privatization" -- within, say, 10 years.

The second step we must take is a generalized conversion of American mortgages to lower interest rates and longer maturities. About 2.3 million U.S. households face foreclosure. That number is certain to rise as more adjustable-rate mortgages reset, driving perhaps 8 million more households into foreclosure and causing home prices to drop further. Few of those affected have any realistic prospect of refinancing at more affordable rates. So, once again, what is needed is state intervention.

Purists say this would violate the sanctity of the contract. But there are times when the public interest requires us to honor the rule of law in the breach. Repeatedly in the course of the 19th century, governments changed the terms of bonds that they issued through a process known as "conversion." A bond with a 5% return was simply exchanged for one with a 3% return, to take account of falling market rates and prices. Such procedures were seldom stigmatized as default.

Another objection to such a procedure is that it would reward the imprudent. But moral hazard only really matters if bad behavior is likely to be repeated, and risky adjustable-rate mortgages aren't coming back soon.

The issue, then, becomes one of fairness: Why help the imprudent when the prudent are struggling too?

One solution would be for the government-controlled mortgage lenders and guarantors, Fannie Mae and Freddie Mac, to offer all borrowers -- including those with fixed rates -- the same deal. Permanently lower monthly payments for a majority of U.S. households almost certainly would do more to stimulate consumer confidence than all the provisions of the stimulus package, including tax cuts.

No doubt those who lost by such measures would not suffer in silence. But the benefits would surely outweigh the costs to bank shareholders, bank bondholders and the owners of mortgage-backed securities.

Americans, Winston Churchill once remarked, will always do the right thing -- after they have exhausted all other alternatives. If we are still waiting for Keynes to save us when Davos comes around next year, it may well be too late. Only a Great Restructuring can end the Great Repression. It needs to happen soon.

Niall Ferguson is a professor at Harvard University and Harvard Business School, a Fellow of Jesus College, Oxford, and a senior fellow of the Hoover Institution. His latest book is "The Ascent of Money: A Financial History of the World

2/01/2009

The Wall Street Journal reports today that the world’s elite, gathering in Davos this week, are amazed at how little they know about the economy. There is even talk about how capitalism itself is a failing business model. One participant, who is giving a business leadership seminar there, is quoted as saying:

The capitalist myth is lovely and youthful. It kicked off the industrial revolution, but maybe we need a new one.

Instead of looking for new government quick-fixes, business and government leaders need to discover (I wish I could say, rediscover) what is real capitalism–free-market capitalism–in theory and practice.

Today’s problems can be traced to the government side of the mixed economy, as well as a perverted capitalist ethic in the boardroom. (The two are related to each other.) Business prudence has been weakened by politically set and artificially low interest rates, by regulations, and by government jawboning for "common-good" lending.

Real capitalism is about government neutrality and noninterference in the economy. From the business side, it is about principled entrepreneurship ™, defined as "maximizing long-term profitability for the business by creating real value in society while always acting lawfully and with integrity" (see p. 79 here). Such value creation can only be measured in a free market where consumers have choices, and where profits and losses are meaningful measures of business performance. And such wealth creation eschews political profiteering, which redistributes and destroys value rather than creates it. Thus political capitalism is discouraged in favor of free-market capitalism by the company practicing principled entrepreneurship.

The World Economic Forum has always been a haven for the political capitalists. In 2001, Ken Lay gave five talks at Davos on his views of Enron and corporate social responsibility (see the Epilogue in Capitalism at Work about Enron’s anti-capitalistic business model).

Indeed, a new business model is needed, and one quite different from what the participants are likely to hear.

WASHINGTON -- "Recidivism" is Rep. Jim Cooper's laconic explanation of why he, although only 54, has spent portions of five decades on Congress' payroll. Responding with aphorisms (e.g., "Bad government starts at the grass roots") to the tedium of Congress' culture of avoidance, he grows more laconic as the welfare state's implosion approaches.

The son of a Tennessee governor, Cooper, a Democrat who represents Nashville, was a congressional page starting in 1969 and then a Rhodes Scholar before being elected to Congress in 1982. Having run unsuccessfully for the Senate in 1994, he returned to the House in 2002. A mordant Cassandra ("If members of Congress were paid on commission to cut spending we'd see fabulous results"), he is no longer astonished by Congress' bipartisan avoidance of the predictable crisis coming to the big three entitlement programs -- Social Security, Medicare and Medicaid.

"Astonishing," says Cooper of the new president's avowed determination to confront the crisis. Leadership, says Cooper, who has seen precious little of it concerning entitlements, enlarges the number of "things that can be talked about." Such as the Social Security payroll tax, which Cooper would cut for several stimulative years from 12.4 percent to 8 percent. It suppresses job-creation, is raising more revenue than Social Security is dispensing and will continue to do so until 2017. The surplus is invested in Treasury bonds. That amounts to lending it to the government "which in turn," Cooper says, "spends it on everything except Social Security."

President Lyndon Johnson, to make the deficit numbers during the Vietnam War less scary, adopted the "unified budget," under which Social Security's surplus was mingled with general revenues, thereby reducing -- disguising, really -- the deficit's size. That, Cooper says, was the "original sin" in the budgeting sleight-of-hand that prevents the public from knowing, and Congress from being compelled to act on, facts about the entitlement programs' unfunded liabilities -- promises to future beneficiaries that future taxpayers may not be willing to pay.

Cooper, who has an unshakable appetite for unappetizing numbers, wishes more Americans were similarly eccentric and would read the 188-page 2008 Financial Report of the United States Government -- the only government document that calculates what deficit and debt numbers would be if the government practiced, as businesses must, accrual accounting.

Under such accounting, future outlays to which beneficiaries are entitled by existing law are acknowledged as expenditures before they are paid. Were the Social Security surplus sequestered for accounting purposes, reflecting the truth that it is already obligated, and were there similar treatment of the other entitlement programs' liabilities, the deficit for the fiscal year that ended Sept. 30 would have been $3 trillion rather than $454.8 billion. The report's numbers show that the true national debt is $56 trillion, not the widely reported $10 trillion.

The report says that in 25 years the portion of the population 65 and older will increase from 12 percent to 20 percent, while the share of the population that is working and paying taxes will decrease from 60 percent to 55 percent. If Medicare spending continues to grow, as it has for four decades, more than one and a half times as fast as the economy, the big three entitlements, which currently are 44 percent of all federal expenditures (excluding interest costs of the national debt), will be 65 percent by 2030. Under current law, 30 years from now government revenues will cover only half of anticipated expenditures.

For years, many conservatives advocated a "starve the beast" approach to limiting government. They supported any tax cut, of any size, at any time, for any purpose, assuming that, deprived of revenue, government spending would stop growing. But spending continued, and government borrowing encouraged government's growth by making big government cheap: People were given $1 worth of government but were charged less than that, the balance being shifted, through debt, to future generations. In 2003, Republicans fattened the beast with the Medicare prescription drug benefit (Cooper opposed it), which added almost $8 trillion in the present value of benefits scheduled, but unfunded, over the next 75 years.

Liberalism's signature achievement -- the welfare state's entitlement buffet -- will, unless radically reduced, starve government of resources needed for everything on liberalism's agenda for people not elderly. Conservatives want government limited, but not this way.

Although President Obama promises entitlement reforms, what can be expected from a Congress with a long bipartisan record of reckless enrichments of the entitlement buffet? Recidivism.

1/27/2009

Majority Says Supreme Court Should Look to Written Constitution for Rulings, Just 35% Think Obama Agrees

Nearly two-thirds of U.S. voters (64%) say U.S. Supreme Court decisions should be based on what is written in the Constitution, but only 35% think President Obama agrees with them.

Twenty-seven percent (27%) say high court rulings should be guided by fairness and justice, and nine percent (9%) are not sure which is more important, according to a new Rasmussen Reports national telephone survey.

A slight plurality of voters (38%) say Obama thinks the Supreme Court should base its decisions on fairness and justice. Twenty-seven percent (27%) are not sure.

As for the court itself, 50% say its decisions are actually based on what is written in the Constitution, the more conservative or strict constructionalist view. Twenty-three percent (23%) say they are based on fairness and justice, the more liberal judicial philosophy. Again, over one-quarter of voters (27%) are undecided.

A majority (53%) believe Supreme Court justices have their own political agenda anyway. Twenty-seven percent (27%) say the justices are impartial, and 21% are not sure.

Amidst speculation that Obama may have to deal with his first vacancy on the Supreme Court by this summer, 38% believe Obama’s nominees will be too liberal, but 45% expect them to be about right. Just five percent (5%) say the new president’s nominees will be too conservative, and 13% are not sure. These numbers are unchanged from a month ago.

Forty-two percent (42%) rate the nominations the new president makes to the Supreme Court as Very Important. Another 33% say Obama’s choices for the high court are somewhat important, with only five percent (5%) saying they are not important at all.

As he nears the end of his first week in the new job, Obama is getting very positive reviews from the nation’s voters in the Rasmussen Reports daily Presidential Approval Index.

Thirty-eight percent (38%) give the Supreme Court good or excellent marks for job performance. Thirteen percent (13%) view the court’s performance as poor. These numbers have been roughly consistent for months.

Seventy-nine percent (79%) of Republicans say high court rulings should be based on what is written in the Constitution, compared to 52% of Democrats. Sixty-four percent (64%) of unaffiliated voters agree.

Forty-six percent (46%) of Republicans say Obama’s nominees to the court are Very Important, a view shared by 41% of Democrats and 39% of unaffiliateds. But Republicans are also nearly twice as likely to say Obama’s nominations are not at all important, compared to the other two groups of voters.

Thirty-eight percent (38%) of GOP voters say Obama believes the Supreme Court justices should decide cases by fairness and justice, while 33% say Obama puts more emphasis on the written Constitution. Democrats and unaffiliated voters are even more narrowly divided, giving the slight edge to what’s in the Constitution.

Sixty-seven percent (67%) of Republicans also believe that Obama’s nominees will be too liberal, while 76% of Democrats say they will be about right. The plurality of unaffiliated voters by 11 points believe they will be too liberal.

1/25/2009

Politicians are in agreement: Government must spend, spend, spend to solve the economic "crisis." The words "economic crisis" are accepted as fact. Why? Why is America in "crisis"?

Treasury secretary Hank Paulson wrote in the New York Times, "We are going through a financial crisis more severe and unpredictable than any in our lifetimes." Is he right? Okay, the Dow Jones Industrial Average fell more than 5,700 points, but bubbles have to pop. In the summer of '82, the Dow was at 776. At 8,228, as of this writing, stocks have risen 1,047 percent in 25 years. America is still way ahead of the game.

But people are losing their jobs! President Obama frets that "the unemployment rate could reach double digits." Yes, that would be bad, but in the recession of '82, it reached 10.8 percent. Yet no one even remembers the "crisis" of '82. Today's 7.2 percent unemployment rate is higher than we've grown used to, but we've experienced that rate 16 times over the past 35 years. And it pales in comparison to the 25 percent rate of the Depression era.

"The bad news is that our economy is broken and there is nothing the government can do to fix it," economist Peter Schiff told the Wall Street Journal. "The free market does have a cure: It's called a recession."

Have we become so fragile that we can't handle any recession? The 11 recessions since World War II are part of the "creative destruction" that ultimately drives our economy, yet today politiciansact as if they can insulate us from pain with bailouts and "stimulus packages."

Even smart people like Paul Volcker say, "This crisis is different." Politicians say things like this because they're too close to the problem. They've panicked. I saw this again and again doing consumer reporting: People closest to problems often panic beyond reason. After 9/11, people overreacted because of fear of terrorism. We federalized airport security and spent tax money on nonsense like bulletproof vests for dogs. In 1999, it was the Y2K computer technicians themselves who were most convinced that computers would freeze and planes crash. It was the bird flu specialists who were convinced that millions would die from the bird flu. Today, it's the scientists creating global warming computer models who are most insistent that we take economically destructive steps to stop climate change.

Fortunately, the bird flu doctors and global warming fanatics didn't hold the reins of government. Unfortunately, today's most frightened people do. Hank Paulson is surrounded by panic; I assume many of his Wall Street banker buddies called to shout: "It's a catastrophe! I've lost everything!" In the echo-chamber of Washington and Manhattan, one starts to believe that this deleveraging is different. This one requires more government. But it doesn't. More government will just delay recovery.

Vice President Biden informed ABC News that "Everyone . . . says the scope of this package has to be bold. It has to be big." Everyone? Hardly. More than 100 prominent economists signed a petition against the stimulus package, and more than 200 signed a petition against the financial bailout.

I liked the headline that the Wall Street Journal gave to an op-ed by George Mason University economist Russ Roberts: "Don't Just Do Something, Stand There." Roberts pointed out that politicians can't wisely spend the trillions they commit, "even if they want to. The information about who needs to be bailed out and who needs to fail is too complicated. . . . It is time to let the imprudent fail and the prudent pick up the bargains."

What if the government had cut loose GM, Citigroup, and the others, forcing them to do what businesses do in hard times: renegotiate with creditors and revalue assets? Wouldn't prices have found a more solid floor? We'll never know. But today the CEOs of those companies would be suckers to drastically revalue assets or sell off a cherished part of the company. If they did that, and then Congress showered their industry with money, they would have cheated their shareholders. Better wait to see what the politicians will do. And so government programs frighten private investors away from making the tough decisions that would start them on the path to real recovery.

Of course some of those companies would fail, and suddenly letting that happen is a political no-no. When the automakers came to Washington to beg, Nancy Pelosi said, "We reject those advocating bankruptcy." Why? Bankruptcy can be a good thing. Kmart declared bankruptcy in 2002, but it didn't disappear. Filing for bankruptcy allowed the company to reorganize itself and reemerge stronger.

George W. Bush told CNN, "I've abandoned free-market principles to save the free-market system." Why did Bush and Pelosi think they knew how to run the economy? F.A. Hayek famously termed this the "fatal conceit"--governments can't possibly know everything that's going on in an economy, and so while government intervention may delay some economic pain, it cannot stop it.

"The arrogance of officialdom should be tempered and controlled," said Cicero in 55 B.C. He was right.

John Stossel is coanchor of ABC News's 20/20 and the author of Myths, Lies, and Downright Stupidity.

1/15/2009

WASHINGTON -- Last November, 13,402,566 California voters expressed themselves for or against Proposition 8, which said that their state's Constitution should be amended to define marriage as a relationship between a man and a woman. The voters, confident that they had a right to decide this question by referendum, endorsed Proposition 8 by a margin of 52.3 to 47.7.

Brown's audacious argument is a viscous soup of natural-law and natural- rights philosophizing, utterly untethered from case law. It is designed to effect a constitutional revolution by establishing an unchallengeable judicial hegemony. He argues that:

The not-really-sovereign people cannot use the constitutionally provided amendment process to define the scope of rights enumerated in the Constitution; California's judiciary, although established by the state's Constitution, has the extra-constitutional right to supplement that enumeration by brooding about natural law, natural justice and natural rights, all arising from some authority somewhere outside the Constitution; the judiciary has the unchallengeable right to say what social policies are entailed by or proscribed by the state Constitution's declaration of rights and other rights discovered by judges.

What is natural justice? Learned and honorable people disagree. Which is why such consensus as can be reached is codified in a constitution. But Brown's reasoning would make California's Constitution subordinate to judges' flights of fancy regarding natural justice. Judges could declare unconstitutional any act of Constitution-revising by the people.

In a brief responding to Brown's, Kenneth Starr -- former federal judge, former U.S. solicitor general, current dean of Pepperdine University Law School -- notes the absurd consequences of the proposition that "the people can never amend the Constitution to overrule judicial interpretations of inalienable rights." Long ago, a California court struck down a Sunday closing law because "it infringes upon the liberty of the citizen, by restraining his right to acquire property." And a court struck down a law against scalping theater tickets because it violated rights "inherent in every natural person." By Brown's reasoning, judges could declare unconstitutional any constitutional amendment revising these judicial judgments.

Passing laws by referenda is an imprudent departure from the core principle of republican government -- representation: The people do not decide issues, they decide who shall decide. But the right of Californians to make laws through the direct democracy of referenda is as firmly established as it is promiscuously exercised.

In 2000, voters passed Proposition 22, enacting a law stipulating that marriage is a heterosexual relationship. Last May, California's Supreme Court struck down the law on the ground that there is no "compelling state interest" in not recognizing same-sex marriages under the constitutional clause guaranteeing "equal protection" of the laws. Opponents of same-sex marriage quickly gathered sufficient signatures to place on the November ballot the amendment to the constitution.

The breadth and depth of California's toleration regarding sexual lifestyles refute the worry that gays are a vulnerable minority menaced by majoritarian tyranny. Proposition 8 merely restored to California law the ancient and nearly universal definition of marriage, a definition resoundingly endorsed by the U.S. Congress (85-14 in the Senate, 342-67 in the House) and written into the laws of 47 other states. California advocates of erasing the right to same-sex domestic partnerships could not even get sufficient signatures to put their measure on the November ballot.

Just eight years ago, Proposition 22 was passed 61.4 to 38.6. The much narrower victory of Proposition 8 suggests that minds are moving toward toleration of same-sex marriage. If advocates of that have the patience required by democratic persuasion, California's ongoing conversation may end as they hope. If, however, the conversation is truncated, as Brown urges, by judicial fiat, the argument will become as embittered as the argument about abortion has been by judicial highhandedness.

Brown's reasoning would establish an unassailable tyranny of a minority -- judges -- over any California majority. Brown, 70, California's former and perhaps future governor, once was a Jesuit seminarian. One American Heritage dictionary definition of "jesuitical" is "given to subtle casuistry"; one of that dictionary's definitions of "casuistry" is "specious or excessively subtle reasoning to rationalize or mislead." These definitions, although unfair to Jesuits, are descriptive of Brown's argument.

1/09/2009

Tomorrow, the House Financial Services Committee will hold a hearing to "discuss priorities" for the Obama administration's use of Troubled Asset Relief Program (TARP) funds. Those priorities could include lending and other directives to financial institutions receiving TARP investments. These directives could be disastrous for taxpayers and the economy if they force banks to engage in unwise lending, or keep weak, troubled banks from being absorbed by stronger banks.

TARP has two major shortcomings. The first is a lack of political support. Congress did not explicitly authorize capital investments in financial institutions when it created the $700 billion program three months ago. The Treasury originally was supposed to buy troubled assets of banks and other financial institutions. It quickly realized that this was unworkable due to challenges in determining asset prices. It then decided to invest TARP funds in the institutions, to increase their capital. But the lack of congressional consent for these investments has understandably stoked controversy about their purpose.

Second, there is widespread confusion about the role capital plays in bank balance sheets, which has exacerbated this controversy. That confusion is evident in comments such as "banks should be forced to lend the TARP monies the government has given them."

Treasury invests TARP funds by purchasing preferred stock in a bank, which adds to the bank's capital. Bank capital, which also includes common stock and retained earnings, serves as a cushion to absorb losses from loans and other bank activities; it is not loaned out directly. Most bank lending is funded by customer deposits and borrowings from third parties (such as the Federal Home Loan Banks).

Potentially, a bank could use its increased capital from TARP to absorb losses from loans and investments already on its books, to acquire banks too weak to remain independent, or to increase its lending. The higher capital boosts a bank's lending capacity because it enables the bank to safely increase its deposits -- and thus its loans -- without increasing its risk of insolvency.

Unfortunately, Treasury has poorly explained the legitimacy of those uses. Congressional debate about TARP may further muddy the waters. A review of these uses show why none should be mandated or barred.

First, even well-managed banks are suffering loan losses as collateral values shrink and the recession deepens. In normal times, a bank would raise new capital to offset those losses. However, the capital markets are not functioning normally, with many sound banks now unable to raise fresh capital.

TARP investments, which increase a bank's capital, therefore serve as a bridge to when normality returns to the capital markets. Because of restrictions accompanying TARP investments, and a jump in the TARP dividend rate after five years to 9% from 5%, banks will have an incentive to raise private capital to finance a buyback of their TARP preferred stock. Taxpayers will profit from these TARP investments because of the dividends paid by the banks on the preferred shares the Treasury purchased.

Second, weak banks need to be acquired by well-managed banks rather than being propped up by TARP investments, for weak banks are not good lenders. The continued existence of weak banks will impede the economic recovery.

However, an acquirer needs to realistically account for losses buried in the other bank's balance sheet even though this accounting will reduce its own capital. The TARP investment should therefore ensure that the merged bank is well capitalized. Eventually, that bank would raise capital to retire its TARP stock.

Third, while a TARP investment increases a bank's lending capacity, lending mandates -- such as that a bank must increase its outstanding loans by some multiple of its TARP investment -- could force banks to make new bad loans.

Unfortunately, banks accepting TARP investments must, under the contract governing Treasury's investment in the bank, agree that Treasury can "unilaterally amend" the agreement "to comply with any changes . . . in applicable federal statutes." Through this provision the new Congress can impose on banks with TARP investments lending mandates or other obligations and restrictions, such as barring the use of TARP funds to acquire weak banks. Even worse, Congress may legislate credit allocation, such as directing that a certain percentage of a mandated lending increase must go to a favored class of borrowers.

Banks are in the lending business: They do not need to be forced to lend. And contrary to popular and political opinion, banks have not stopped lending. Despite the recent financial market turmoil, a declining GDP, and an increase in loan-loss reserves, commercial bank lending actually grew $336 billion, or 4.9%, from August to Dec. 24, according to Federal Reserve data. While lending dictates or other restrictions may be tempting, the Obama administration must discourage Congress from imposing them on recipients of TARP investments.